Building out, maintaining and upgrading a SaaS company's technology stack is a big chunk of the work done at a SaaS business. The costs associated with these activities are considered Research and Development (R&D) expenses. It's common for SaaS businesses to look closely at R&D expenses as a percentage of revenue to understand their investment compared to other business areas. This metric also allows SaaS firms to benchmark their R&D expenses against peers and set targets to keep their costs under control.
Want to learn more about Research & Development expenses as a percentage of revenue? Keep reading for the full scoop and benchmarks that are common in SaaS.
What are Research and Development expenses as a percentage of revenue?
This metric shows the percentage of revenue spent on Research & Development during a given time period. The metric is a useful measure of how much is being spent on product-related activities at SaaS organisations.
R&D as a percent of revenue tends to decrease as the product becomes more mature. Later-stage companies with an ARR of more than $100 million spend 35% of revenue on R&D. However, for early-stage, VC backed startups with an ARR of less than $10 million, the average is 95%.
What to include in Research & Development expenses?
R&D is one of the four fundamental expense categories for a SaaS company. The other three are Cost of Goods Sold, Sales and Marketing, and General and Administrative.
Accounts that are typically mapped to the R&D expense category are:
- Engineering salaries
- Specialist software used by product and engineering
- Customer research
- AWS bills
How to calculate Research & Development expenses as a percentage of revenue?
It is calculated by dividing Research & Development expenses by total revenue earned by the company.
Optimising Research & Development expenses for more profitability
Want to benchmark your Research & Development expenses as a percentage of revenue?
We are currently offering a free template to help SaaS organisations benchmark their valuation, LTV, Net Revenue Retention, MRR, Net Revenue Retention Rate, revenues and expenses against 200 VC-funded private companies in the Bessemer Venture Partners portfolio. Click here to access the free SaaS metrics valuation benchmarking template.